Trading felt like a maze when I first started. Every chart looked like a mystery, and every price move left me second-guessing myself. I’d watch price action spike and dip, drawing random lines on my screen and hoping something clicked.
Then, I started recognizing patterns—like the bear flag pattern—and suddenly, the noise became clearer. Sound familiar?
Then I began noticing a recurring behavior in certain downtrends—a sharp fall, followed by a deceptive pause that fooled many into thinking a rebound was underway. But more often than not, that pause was nothing more than a setup for another leg lower.
This guide is for you if you’re new to technical analysis or struggling to read trend continuation setups correctly. I’ll walk you through the exact signs I look for, how to time my trades, and what tools help filter out the noise. Consider this your roadmap—shaped by real trades, real lessons, and real results.
What Is This Setup Really Showing You?
Understanding The Market Psychology Behind It
After a sharp downward move, the market tends to breathe. This breathing phase isn’t a reversal; it’s hesitation. It’s where novice traders often get trapped, believing a rally is coming, while seasoned traders quietly prepare for the next move lower.
This type of setup occurs when fear cools just enough for short-term optimism to step in. Prices slowly creep upward, sometimes even making higher lows. But underneath that calm is exhaustion, not strength. Recognizing this psychological tug-of-war is key to interpreting what the chart is really saying.
My First Encounter: Trading Lessons From a Costly Mistake
Years ago, I was tracking a small-cap tech stock that had tanked nearly 18% in just two days. I assumed the worst had passed and jumped in, thinking I’d caught a bargain. Within 48 hours, the stock broke down again—another 10% gone. I had walked into a textbook trap.
Looking back, all the signs were there. The climb after the plunge was sluggish, volume was drying up, and momentum indicators never confirmed a true reversal. That experience was a turning point. I started researching, journaling, and eventually developing my checklist.
It wasn’t just about identifying the pattern—it was about understanding the “why” behind it.
Key Characteristics of the Setup
The Anatomy of a Continuation Move
Let’s break it down.
- The Impulse Move (The “Pole”)
This is the strong, steep price drop that initiates the sequence. It’s usually accompanied by heavy selling volume and clear bearish momentum. Think of this as the warning shot—the move that grabs attention. - The Consolidation Phase
This is where many traders misread the situation. Price starts to climb or move sideways in a tight, controlled range. It might look like the start of a recovery, but it’s more like a rubber band stretching before the next snap. - The Breakdown
Eventually, the illusion of recovery fades. A surge in volume confirms that sellers are back. When the price breaks below the lower edge of the consolidation range, that’s your signal.
Step-by-Step: How to Trade This Setup With Confidence
Step 1: Start With Context
Always zoom out. Is the broader trend downward? If yes, this setup holds more weight. Avoid isolating your analysis to just the most recent candles. Look at the larger picture.
Step 2: Spot the Pause
After a steep fall, wait for the slowdown. The key is recognizing the tight consolidation that doesn’t show true strength. Price might inch up, but volume will often fade. This is your early clue.
Step 3: Confirm the Breakdown
Don’t jump the gun. I always wait for confirmation. A clean break below the lower support line with a rise in volume is my green light.
Step 4: Set Targets Based on the Initial Drop
One common strategy I use is projecting the initial drop downward from the breakdown point. If the first drop was $12, and the breakdown occurs at $65, I expect a move to around $53.
Tools and Indicators That Help
While price action is my foundation, I use a few tools to increase my confidence:
- Volume: Decreasing during the pause, then spiking at breakdown = strong confirmation.
- RSI: Often hovers near neutral during consolidation but quickly drops as the new move begins.
- Moving Averages: A declining 20-period EMA above price adds conviction.
These tools help filter noise and provide objective backing for what the chart suggests.
Real Chart, Real Trade: Breaking It Down
I recently traded a breakdown in a mid-tier energy stock. It dropped from $94 to $81 in three sessions, then paused near $84 for a few days. Volume declined, and price action felt like it was drifting without purpose. Once the price slipped below $83 on higher volume, I entered. My exit?
The projected move from the $13 drop gave me a $70 target. It hit within two days. This kind of setup is exactly what we break down at Alchemy Markets, teaching you how to read the market’s subtle cues. And with the Elliott Wave Course, you learn to recognize these moves in the context of larger market waves, giving you a more strategic edge.
It wasn’t luck—it was pattern recognition, backed by logic and preparation.
Conclusion
Mastering this setup has given me something invaluable: clarity. I no longer guess whether a pause in a downtrend means a bounce or more downside. I read the signs, check my criteria, and act when the moment aligns.
This isn’t just about learning a pattern. It’s about training your eyes, managing your emotions, and trusting your preparation.
Print charts. Mark them up. Build a database of setups. Eventually, the hesitation fades and confidence takes its place.
Trading isn’t about predicting—it’s about preparing. And once you recognize these continuation setups for what they truly are, the noise begins to fade, and the edge becomes clear.
Frequently Asked Questions
How Often Does This Setup Appear?
More often than you’d expect. It’s especially common in volatile markets or after big news events. Once you know what to look for, you’ll start seeing it everywhere.
Is It Reliable for Beginners?
Yes, but patience is key. Many lose money by entering too early. Wait for confirmation.
Can It Be Used in Crypto and Forex?
Absolutely. This behavior is rooted in human psychology, and that doesn’t change across asset classes.
What Timeframes Work Best?
Daily charts are most reliable, especially for swing traders. However, with experience, you can spot this on 1-hour and 4-hour charts for shorter trades.
